UPDATE 3-France posts surprise Q3 GDP growth, outlook still weak

* Data confounds fears France might slip into recession

* Growth driven by household consumption, strong trade data

* Boost to embattled President Hollande, as bond yields fall
at auction

By Daniel Flynn

PARIS, Nov 15 France's economy unexpectedly grew
in the third quarter as households splashed out on clothing and
trade data turned positive, though high unemployment and rising
taxes make for a gloomy outlook.

There was further good news as investors piled into a French
government bond auction on Thursday, sending two-year yields to
a record low as they sought a safe alternative to ultra-low
returns on German debt.

Economists cautioned though that with unemployment running
at a 13-year high and 30 billion euros ($38 billion) in
additional taxes on households and businesses set to kick in
next year, the bounce in the euro zone's second-biggest economy
was unlikely to be maintained.

"A positive figure for the third quarter does not mean the
crisis is over," said Philippe Waechter of Natixis Asset
Management. "Private demand - both consumption and capital
investment - are still very low. There's no momentum."

Prime Minister Jean-Marc Ayrault said the GDP figures did
not take the pressure off the government to turn around the
economy, which had stalled for three quarters until the
third-quarter uptick.

"These indicators are promising but they're not enough,"
Ayrault said as he arrived in Berlin to meet German Chancellor
Angela Merkel and defend the Socialist government's economic
policies in the face of German concerns about France's flagging
exports.

"The battle for growth is on and we absolutely must not ease
up on this," Ayrault said.

Second-quarter gross domestic product was revised down to
show a 0.1 percent contraction instead of being flat, according
to data from the INSEE national statistics office.

Growth in the third quarter beat a Reuters poll forecast for
zero growth quarter-on-quarter.

Household spending rebounded as spending on clothing rose
strongly in the quarter, while consumers also spent more on
health and services, the data showed.

The unexpected growth may provide a boost to President
Francois Hollande who has launched a drive to turn around
France's flagging competitiveness and lower unemployment. The
weak economy has been a key factor in driving down his approval
ratings since he took office in May.

Broken down by sector, household consumption, the engine of
France's 2 trillion euro economy, grew by 0.3 percent in the
third quarter after contracting 0.2 percent in the previous
three months. Destocking by French firms, particularly in the
transport sector, and falling investment were a drag on growth.

After two quarters of mild contraction, manufacturing output
also crept up 0.1 percent, lifted by a rise in sales of
transport materials and refining and coking.

Growth in exports accelerated to 0.5 percent from 0.3
percent in the second quarter. Crucially, volatile import demand
declined 0.6 percent after strong growth of 1.6 percent in the
second quarter.

GLOOMY OUTLOOK

Still, while France performed better than expected in the
third quarter the outlook is gloomy as separate data on Thursday
showed the euro zone as a whole slipped into its second
recession since 2009.

France's unemployment rate of 10.2 percent is weighing on
its 2-trillion euro economy and weak industrial production and
business sentiment surveys, as well as looming tax rises,
suggest it may end the year on a down note, economists say.

"We expect the French economy to contract again in the final
quarter of this year," said Joost Beaumont of ABN Amro.

Hollande's government unveiled a plan last week to boost the
competitiveness of French industry, including 20 billion euros a
year in tax credits to lower labour costs. However, German
government sources have expressed concern the measures do not go
far enough.

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